The New Bankruptcy Law "Means Test" Explained in Plain English

The Law - The New Bankruptcy Law "Means Test" Explained in Plain English

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With the new bankruptcy law in corollary since October 17, 2005, there is a lot of blurring with regard to the new "means test" requirement. The means test is used by the courts to rule eligibility for lesson 7 or lesson 13 bankruptcy. The purpose of this report is to account for in plain language how the means test works, so that consumers can get a better idea of how they will be affected under the new rules.

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When most population think of bankruptcy, they think in terms of lesson 7, where unsecured debts are normally discharged in full. Bankruptcy of any variety is a difficult ordeal at best, but at least with lesson 7, a debtor was able to wipe out their debts in full and get a fresh start. lesson 13, however, is other story, since the debtor must pay back a primary portion of the debt over a 3-5 year period, with 5 years being the appropriate under the new law.

Prior to the arrival of the "Bankruptcy Abuse arresting and buyer safety Act of 2005," the most tasteless guess for man to file under lesson 13 was to avoid the loss of equity in their home or other property. And while equity safety will continue to be a big guess for population to select lesson 13 over lesson 7, the new rules will force many population to file under lesson 13 even if they have No equity. That's because the means test will take into catalogue the debtor's revenue level.

To apply the means test, courts look at the debtor's median revenue for the 6 months prior to filing and assess it to the median revenue for that state. For example, the median each year revenue for a single wage-earner in California is ,012. If the revenue is below the median, then lesson 7 remains open as an option. If the revenue exceeds the median, the remaining parts of the means test comes into play.

This is where it gets a minute bit trickier. The next step in the calculation takes income, less living expenses (excluding payments on the debts included in the bankruptcy), and multiplies that outline times 60. This represents the amount of revenue available over a 5-year duration for repayment of the debt obligations.

If the revenue available for debt repayment over that 5-year duration is ,000 or more, then lesson 13 will be required. In other words, anyone earning above the state median, and with at least 6.67 per month of available income, will automatically be denied lesson 7. So for example, if the court determines that you have 0 per month revenue above living expenses, 0 times 60 is ,000. Since ,000 is above ,000, you're stuck with lesson 13.

What happens if you are above the median revenue but do Not have at least 6.67 per month to pay toward your debts? Then the final part of the means test is applied. If the available revenue is less than 0 per month, then lesson 7 again becomes an option. If the available revenue is in the middle of 0 and 6.66, then it is measured against the debt as a percentage, with 25% being the benchmark.

In other words, let's say your revenue is above the median, your debt is ,000, and you only have 5 of available monthly income. We take 5 times 60 months (5 years), which equals ,500 total. Since ,500 is less than 25% of your ,000 debt, lesson 7 is still a inherent option for you. If your debt was only ,000, then your ,500 of available revenue would exceed 25% of your debt and you would be required to file under lesson 13.

To sum up, first outline out either you are above or below the median revenue for your state - median revenue figures are available at http://www.new-bankruptcy-law-info.com. Be sure to catalogue for your spouse's revenue if you are a two-income family. Next, deduct your median monthly living expenses from your monthly revenue and multiply by 60. If the corollary is above ,000, you're stuck with lesson 13. If the corollary is below ,000, you may still be able to file lesson 7. If the corollary is in the middle of ,000 and ,000, assess it to 25% of your debt. Above 25%, you're seeing at lesson 13 for sure.

Now, in these examples, I have ignored a very foremost aspect of the new bankruptcy law. As stated above, the amount of monthly revenue available toward debt repayment is carefully by subtracting living expenses from income. However, the figures used by the court for living expenses are Not your actual documented living expenses, but rather the schedules used by the Irs in the variety of taxes.

A big question here for most consumers is that their household budgets will not reflect the harsh reality of the Irs approved numbers. So even if you think you are "safe," and are able to file lesson 7 because you don't have 0 per month to spare, the court may rule otherwise and still force you into lesson 13. Some of your actual expenses may be disallowed.

What remains to be seen is how the courts will cope cases where the cost of mortgages or home rentals are inflated well above the government schedules. Will debtors be imaginable to move into economy housing to meet the court's required schedule for living expenses? No one has any answers to these questions yet. It will be up to the courts to account for the new law in convention as cases hike straight through the system.

I hope you get new knowledge about The Law. Where you possibly can offer used in your day-to-day life. And most of all, your reaction is passed about The Law.